Everything You Need to Know About Refinancing to Consolidate Debt

Why Refinance to Consolidate Debt?

If you're juggling multiple debts - credit cards, car loans, personal loans - you're not alone. Many current and former Australian Defence Force members find themselves managing various repayments each month, often at different interest rates. The good news? Your home loan might hold the key to simplifying your finances.

Refinancing your home loan to consolidate debt means rolling your various debts into your mortgage. Because home loans typically have a lower interest rate compared to credit cards and personal loans, this strategy can reduce your overall monthly repayments and improve cashflow.

Understanding Debt Consolidation Through Refinancing

When you consolidate into mortgage, you're essentially releasing equity in your property to pay off other debts. Here's how it works:

1. Your property undergoes a property valuation to determine how much equity you can access
2. You apply to refinance home loan with a higher loan amount that covers your existing mortgage plus your other debts
3. Once approved, the lender pays out your old mortgage and your other debts
4. You're left with one repayment at a mortgage interest rate

For ADF members who may be paying high interest rates on multiple credit facilities, this approach can save thousands over the life of the loan.

When to Refinance for Debt Consolidation

Timing matters when considering a refinance to consolidate debt. Here are situations where it makes sense:

• You're stuck on high rate credit cards (often 15-20% interest) or personal loans
• Your fixed rate period ending and you're reviewing your options anyway
• You've built up sufficient equity in your property
• Your monthly debt repayments are impacting your lifestyle
• You want to reduce loan costs and streamline your finances

Many Defence members coming off fixed rate find this is the perfect opportunity for a loan health check and to explore debt consolidation options.

The Benefits of Consolidating Debt Through Your Mortgage

Lower Interest Rate

The most significant advantage is accessing a lower interest rate. While credit cards might charge 18-22% annually, a variable interest rate or fixed interest rate on a home loan typically sits much lower. This difference can mean paying too much interest unnecessarily on consumer debts.

Improved Cashflow

Consolidating multiple repayments into one can dramatically improve your monthly budget. Instead of juggling five or six different payment dates and amounts, you have one predictable mortgage repayment.

Access to Mortgage Features

When you move mortgage debts into your home loan, you might also gain access to features like a refinance offset account or refinance redraw facility, giving you more flexibility in managing your money.

The Refinance Process for Debt Consolidation

The refinance application doesn't need to be complicated. Here's what to expect:

1. Loan Review: Assess your current financial situation and all debts you want to consolidate
2. Equity Assessment: Determine how much equity you can unlock in your property
3. Lender Comparison: Compare refinance rates and loan features across different lenders
4. Application: Submit your refinance mortgage application with supporting documents
5. Property Valuation: The lender arranges a valuation of your property
6. Approval and Settlement: Once approved, your new loan settles and pays out your existing debts

At Defence Loans, we understand the unique circumstances of ADF members, including frequent relocations and deployment schedules, and can tailor the refinance process accordingly.

Important Considerations Before You Refinance

Equity Requirements

To access equity and consolidate debt, you'll need sufficient equity in your property. Most lenders require you to maintain at least 20% equity after the refinance, though ADF members may have access to specialist products through no LMI loans.

Total Interest Over Time

While you'll save on interest rate compared to credit cards, remember that you're extending the repayment period. A $30,000 credit card debt paid over 30 years will cost more in total interest than paying it off in three years, even at a lower rate. Consider making extra repayments where possible to offset this.

Break Costs

If you're currently in a fixed rate period, you may face break costs when refinancing. If your fixed rate expiry is approaching, it might be worth waiting. Check our fixed rate expiry page for more information.

Spending Habits

Consolidating debt only works if you address the underlying spending patterns. Once you've paid off credit cards through refinancing, avoid running them up again.

Why ADF Members Choose to Refinance

Defence Force members face unique financial circumstances. Frequent postings, deployment allowances, and service-related benefits mean your financial situation might differ from civilian borrowers. The reasons why refinance include:

• Consolidating debts accumulated during postings or relocations
• Taking advantage of ADF-specific lending options
• Improving cashflow to manage family expenses during deployment
• Accessing equity for investment in another property
• Securing a lower interest rate as your circumstances improve

Switch to Variable or Switch to Fixed?

When you refinance, you'll need to decide between a variable interest rate and fixed interest rate. Each has advantages:

Variable Rates:

• Potentially access a better interest rate if rates fall
• More flexibility with extra repayments
• Access to features like offset accounts

Fixed Rates:

• Lock in rate for certainty in budgeting
• Protection if interest rates rise
• Predictable repayments throughout the fixed period

Many borrowers choose a split loan, combining both options for flexibility and security.

Releasing Equity Beyond Debt Consolidation

While we're focusing on debt consolidation, refinancing can also help with other goals. You might release equity to buy the next property, fund renovations, or even start expanding your property portfolio. Understanding all your options ensures you make the most of your equity release.

For ADF members looking to grow wealth through property, consider exploring investment loan refinancing options.

How Much Can You Save Money Refinancing?

Let's look at a realistic scenario. Say you have:

• $20,000 credit card debt at 19% interest (minimum monthly repayment: $500)
• $15,000 personal loan at 12% interest (monthly repayment: $450)
• $10,000 car loan at 8% interest (monthly repayment: $350)

Total monthly repayments: $1,300

By consolidating this $45,000 into your mortgage at 6% interest over the remaining loan term, your additional monthly repayment might be around $270-320 (depending on the loan term). That's potentially an extra $1,000 per month in your pocket.

Over just one year, that's $12,000 in improved cashflow - money that can go towards your savings, family, or lifestyle.

Getting Started with Your Refinance

Considering whether to consolidate debt through refinancing? The first step is understanding your current position. Review your:

• Current home loan amount and interest rate
• All outstanding debts and their interest rates
• Property value (to estimate available equity)
• Monthly income and expenses

This information will help determine if refinancing to consolidate debt makes financial sense for your situation.

For personalised advice tailored to ADF members, our team at Defence Loans specialises in home loan refinancing for ADF members and can assess your individual circumstances.

Your financial wellbeing matters, and refinancing your mortgage to consolidate debt could be the strategy that puts you back in control. Whether you're looking to improve cashflow, reduce what you're paying in interest, or simply have one manageable repayment instead of many, exploring your refinance options is a smart move.

Call one of our team or book an appointment at a time that works for you. We'll conduct a comprehensive review of your situation and help you understand whether refinancing to consolidate debt is the right choice for your financial future.